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The Problem with Paying Back TARP $

CNN Money
So far, Treasury has funneled close to $200 billion in funds into banks across the country, including the $165 billion that was injected into the eight leading institutions that appeared before Congress this week.

Raising that amount of money would require pretty a robust appetite by outside investors – a group that has been pretty unwilling as of late to bet on anything related to the financial services industry.

Banks may soon not have to deal with this requirement though. The stimulus bill that passed the House late Friday included language that instructs Treasury to let banks repay TARP investments without raising fresh capital.

Nonetheless, the terms of TARP still dictate that both Treasury as well as an institution’s respective regulator, such as the Office of the Comptroller of the Currency or Office of Thrift Supervision, would have the final say before allowing them.

Some bankers groused Wednesday that those restrictions have served as an impediment, prompting some lawmakers to consider making it easier to pay back the government.

“If you want to give back the money we will take it, and if there are obstacles we will undo those obstacles,” said Rep. Barney Frank, D-Mass, the chairman of the House Financial Services Committee.

…but would Treasury allow it?

Still, it is becoming clear that regulators may not want banks to return TARP money so soon…even if Congress were to allow it.

A source familiar with the situation indicated there was a sense of hesitancy within the Treasury Department to let TARP recipients pay back the government funds. That’s because doing so could send a signal to the markets about which banks are strong and which are not.

Treasury officials would not comment on which institutions, if any, have approached the agency about repaying the funds early.

But some industry observers noted that fears about how a bank that doesn’t quickly return TARP money may be perceived are overblown. After all, investors already have a clear notion about which banks are healthy and which are continuing to struggle.

“The market already understands who needs the money and who doesn’t,” said Dave Kaytes, managing director at the New York City-based consultancy Novantas, which focuses on financial institutions.

What’s more, healthy banks that want to get out from the under the watchful eye of regulators may still have a hard time justifying doing so. That’s because it may be difficult to find capital on terms that are as inexpensive as the government is offering.

So even if they are permitted to do so, banks will have to think twice about bailing on the TARP program.

Banks have already lost billions of dollars as a result of the freefall in the housing market. If the unemployment rate continues to climb, banks would face additional loan losses, putting further pressure on their capital levels.

In other words, bankers could soon find themselves eating their words about giving back TARP funds…assuming that they were serious about returning the money quickly in the first place.

“In our view, the comment on paying back TARP is simply posturing,” said Tim Backshall, chief strategist at Credit Derivatives Research.

For more information, contact Novantas Marketing

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